Since Congress passed the tax reform package late in 2017, the Minnesota Department of Revenue has been working to determine potential effects on Minnesota tax filers. This week, it released a preliminary estimate of Minnesota tax impacts if the legislature conforms, or updates Minnesota’s tax code to match federal changes with no corresponding changes to state definitions.
Under that scenario, 658,516 filers would see a Minnesota tax increase of $150 or more, while 354,897 taxpayers would see a tax cut of more than $150. Broken down, the highest number of filers experiencing a tax increase – 299,473 – would be those earning $80,000-$150,000, who would see an average tax hike of $493. In that same income range, 221,929 filers would see an average tax decrease of $173.
In the $30,000-$80,000 income range, 298,074 taxpayers would see an average tax increase of $340, while 579,249 filers would see an average $100 tax decrease if the state simply conforms to federal changes.
This is not a complete estimate because it does not include the effects of another federal change, which allows more opportunities for business pass-through income, but it provides a preliminary landscape for lawmakers to consider. Typically, the legislature passes a “conformity bill” each year that delivers tax savings to almost all filers. This year is different because Minnesota tax calculations begin with federal taxable income (FTI). Congress’ changes increased FTI but also included new federal rates and credits that partially offset the increase. Aligning Minnesota’s tax code would capture the higher FTI definition but not the new federal decreases, unless lawmakers develop similar adjustments for Minnesota taxes.
Now, my Minnesota Senate colleagues and I are facing three general choices in the tax committee on which I serve. The first option is to simply conform to federal changes but, as noted above, that option risks a tax increase on millions of Minnesota individuals and businesses. The second option is to not change Minnesota’s tax system at all. This would not change anyone’s state tax liability, but it would create an extremely complicated tax filing system next year. The third option is a mix of the first two – conform to some federal changes and pass new state-based credits or rate changes to mitigate the effects.
If Minnesota is going to consider any dramatic tax changes, we must do it in the context of our own state budget. The federal bill added about $1.3 trillion in debt, something the state obviously cannot do. Minnesota currently has a $329 million projected surplus, but that will run out very quickly just by factoring in inflation, let alone additional needed investments in state priorities. We must be prudent and consider the long-term impact any tax changes we make could have on our budget and our taxpayers.
Now is the time for public input and committee hearings, not on the last night of session behind closed doors. Governor Dayton’s budget and tax recommendations will come out March 15, which will provide a starting point for legislators to begin working in earnest to find a solution. I look forward to working with my Senate colleagues on a responsible approach to tax fairness. We can make sure tax changes help those who need it most without compromising the economic health and stability of our state.